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Aug 8, 2019

Kraft Heinz's long-delayed results give rough welcome to new CEO

Brett Girard discusses Kraft Heinz

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Kraft Heinz Co.’s (KHC.O) new chief is off to a tough start: Shares plunged to a record low during his first conference call as he failed to reassure investors about the troubled food maker’s prospects for a comeback.

Miguel Patricio, just five weeks after taking the reins, told wary shareholders that the strategy under his predecessor didn’t quite work. But he fell short of laying out his own plan to revitalize the big brands like Oscar Mayer and Maxwell House that are out of step with modern consumers’ tastes. He said Kraft Heinz needs a “comprehensive strategy” but that he didn’t have enough confidence to issue guidance at this time. The company also withdrew its previous EBITDA guidance for the year.

“We’ve been too focused on the present and literally on fire fighting,” he said on a conference call. “We need to work on our competencies for the future with the mentality to make it better every day.”

The stock plunged as much as 16 per cent to US$26.05 Thursday, the lowest intraday level since the company was formed in a 2015 merger orchestrated by Warren Buffett and the private equity firm 3G Capital. The company has now seen about US$20 billion in market value wiped out this year.

A longtime executive at Anheuser-Busch, Patricio took over the troubled food maker from Bernardo Hees after a slew of bad news rattled the company in February, including weak profit numbers, a $15.4 billion writedown and an SEC subpoena. But while Patricio brings fresh blood into the struggling foodmaker, he was trained in the 3G style during his time at the beermaker, which is also backed by the founders of 3G, known more for slashing costs than building brands.

Kraft Heinz shares have been on a downward slide since February 2017, when its bid to acquire Unilever was rebuffed. Without a major deal like that, the company will have to try and boost sales and profit by selling more food, a difficult challenge with its aging brands.

‘Substantial’ Challenges

At Kraft Heinz, healthier has largely meant giving a face lift to old favorites, like cutting artificial dyes in its macaroni and cheese with ingredients like paprika and turmeric, rather than a full-fledged overhaul. The premiumization strategy has worked in Heinz ketchup, however, Patricio said, pointing to better results in organic and sugar-free ketchups.

“The near-term challenges are substantial,” said Jennifer Bartashus, an analyst at Bloomberg Intelligence. “Kraft Heinz is facing a long and difficult path to achieve sustainable sales and earnings growth.

For the first six months of the year, EBITDA slipped 15 per cent in the company’s home market. Net sales fell too. The maker of Heinz ketchup and Jell-O also reported two new impairment charges totaling about US$1.2 billion.

“The level of decline we experienced in the first half of this year is nothing we should find acceptable moving forward,” Patricio said as the company reported results.

No Plan

He said the company would look for efficiencies in its supply chain, where costs had gone up, and opportunities for investments in its core brands instead of launching too many new ones. For now, the plan is just to make a plan.

The company announced in May that it received an additional subpoena related to its procurement practices, which forced it to restate earnings for the last the three years. Kraft Heinz has said the changes are not material. Patricio didn’t give more details on the situation Thursday.

Kraft Heinz’s plunge on Thursday leaves Berkshire Hathaway Inc.’s stake valued around US$8.5 billion, well below the US$13.5 billion that Warren Buffett’s company has Kraft Heinz marked on its books. While Berkshire has not taken a writedown on its stake as of the second quarter, the company has said it’s possible that an impairment could come in the future.

Berkshire’s stake would entitle it to recognize almost US$230 million in profit from Kraft Heinz’s first-half results. That’s less than half of the US$467 million it recorded in 2018’s first six months.

Risk premiums on Kraft Heinz’s 4.375 per cent bonds due 2046 widened 16.9 basis points, the biggest increase since May, to 235.2 basis points Thursday morning, according to Trace pricing.

--With assistance from Katherine Chiglinsky.